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It looks as though interest rates will remain low for the next two years. At their January meeting, members of the Federal Open Market Committee not only kept the target federal funds rate between 0 and 1/4 percent, they, as a group, projected the next rate increase would likely not come until 2014 at the earliest. They also set the inflation target at 2%. Here is a look at the Fed's projections for GDP and unemployment: At his press conference following the meeting, Ben Bernanke noted that the Fed needs to remain open to measures to "provide further stimulus" if the pace of recovery slows: Read the FOMC January statement here .

Did you miss the 2011 Financial Report of the United States Government the Treasury Department released on December 23? Bruce Bartlett did not. At Economix , he pulls out some key facts from the report, and scares us a little bit with this graph: Notice how much the projected future spending is not on government programs, but rather on interest owed against the federal debt. And that spending is not, as Barlett notes, "just another government program that can be cut." The way to cut that spending is by running a surplus. Bartlett: With interest rates at historical lows and the vast bulk of the debt in the form of short-term securities that roll over rapidly, the figures in the chart above are probably conservative. It is not hard to envision a situation in which interest on the debt rises more quickly than spending can be cut — a problem many European nations are in today. It’s essential that we strive to overcome budgetary myopia. Our debts are manageable, but only if we take a long-run perspective. Read The True Federal Debt here .

The epicenter for concern in Europe has shifted from Greece to Italy, with interest rates on Italian bonds rising past 7% today. The rise comes despite the European Central Bank (ECB) buying up bonds over the last week in an effort to counter massive sell-offs by investors, according to the Wall Street Journal . If Italy can't attract investors and raise funds to honor its debt, Europe faces a much bigger challenge than it has been facing with Greece's debt struggles. Barry Eichengreen , professor of Economics and Political Science at the University California at Berkeley, says the days of Germany's and France's leaders managing Europe's effectively are over. At Project Syndicate , Eichengreen argues that the only option for Europe's leaders now is to bolster the ECB: Specifically, the ECB must do much more to support economic growth. Its decision to cut rates by 25 basis points at the first policy meeting under its new president, Mario Draghi, is the one ray of light in an otherwise darkening sky. But 25 basis points are a drop in the bucket. With Europe headed for recession, the danger of rising inflation is nil. Still, given German sensitivities, Merkel should use her bully pulpit to reassure her public. More controversially, the ECB needs to increase its purchases of Italian bonds. Unless yields on those bonds fall to German levels, there is no way that Italy’s debt arithmetic can be made to add up. But Draghi has indicated that he is reluctant to see the ECB become a lender to governments. Reassuring the markets by adopting structural reforms, he has observed, is properly the responsibility of those governments, not of the central bank. But structural reforms cannot be accomplished overnight. Italy needs time to put its pro-growth reforms in place. Not providing that time would sound the death knell for the euro. Here’s where the political cover comes into play. Merkel and Sarkozy need to make the case that if the euro is to become a normal currency, Europe needs a normal central bank – one that does not merely target inflation like an automaton, but that also understands its responsibilities as a lender of last resort. Read Europe’s Darkness at Noon here .

Calling the Fed's latest maneuvering, dubbed operation twist , extreme policy might seem a little, well, extreme. But that is exactly what the folks at Central Bank News have done in adding it to the list of the most extreme policy moves of 2011. Here's the list: 1. Belarus Financial Crisis 2. The Twist 3. Swiss Franc Floor 4. ECB SMP and the Confidence Crisis 5. Bank of Japan Earthquake Response 6. Vietnamese Hyperinflation 7. Brazilian Rate Reversal 8. Kiwi Earthquake Insurance 9. Joint Liquidity Operations 10. 'Chindia' Tightening For details of each of the policy moves listed above, read Top 10 Most Extreme Monetary Policy Moves of 2011 here .

The Fed has released the minutes from the June Federal Open Market Committee meeting, and it is an interesting read. Okay, maybe interesting isn't the right word. Perhaps illuminating. In short, members of the committee hold to their views that the slow but steady recovery will continue, though they are looking at it as more slow now than they thought it would be a few months ago. And they largely hold to their policies of the moment--though there is clearly some disagreement over monetary policy moving forward: Most participants expected that much of the rise in headline inflation this year would prove transitory and that inflation over the medium term would be subdued as long as commodity prices did not continue to rise rapidly and longer-term inflation expectations remained stable. Nevertheless, a number of participants judged the risks to the outlook for inflation as tilted to the upside. Moreover, a few participants saw a continuation of the current stance of monetary policy as posing some upside risk to inflation expectations and actual inflation over time. However, other participants observed that measures of longer-term inflation compensation derived from financial instruments had remained stable of late, and that survey-based measures of longer-term inflation expectations also had not changed appreciably, on net, in recent months. These participants noted that labor costs were rising only slowly, and that persistent slack in labor and product markets would likely limit upward pressures on prices in coming quarters. Participants agreed that it would be important to pay close attention to the evolution of both inflation and inflation expectations. A few participants noted that the adoption by the Committee of an explicit numerical inflation objective could help keep longer-term inflation expectations well anchored. Another participant, however, expressed concern that the adoption of such an objective could, in effect, alter the relative importance of the two components of the Committee's dual mandate. Participants also discussed the medium-term outlook for monetary policy. Some participants noted that if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate and if inflation returned to relatively low levels after the effects of recent transitory shocks dissipated, it would be appropriate to provide additional monetary policy accommodation. Others, however, saw the recent configuration of slower growth and higher inflation as suggesting that there might be less slack in labor and product markets than had been thought. Several participants observed that the necessity of reallocating labor across sectors as the recovery proceeds, as well as the loss of skills caused by high levels of long-term unemployment and permanent separations, may have temporarily reduced the economy's level of potential output. In that case, the withdrawal of monetary accommodation may need to begin sooner than currently anticipated in financial markets. A few participants expressed uncertainty about the efficacy of monetary policy in current circumstances but disagreed on the implications for future policy. Read through the full minutes here .

China's latest 5-year-plan--the country's 12th--seeks to "improve people's livelihoods, social infrastructure and safety nets, and to tackle rising inequality," according to the BBC 's Sarah Wang . And that likely means pushing for an increase in consumer spending. Martin Feldstein believes that any significant shift away from maximizing GDP growth as China's overarching economic objective will bring have far reaching consequences on the global economy. Namely, interest rates will likely go up as China's savings rate goes down. At Project Syndicate , Feldstein writes: A country that saves more than it invests in equipment and structures (as China does) has the extra output to send abroad as a current-account surplus, while a country that invests more than it saves (as the United States does) must fill the gap by importing more from the rest of the world than it exports. And a country with a current-account surplus has the funds to lend and invest in the rest of the world, while a country with a current-account deficit must finance its external gap by borrowing from the rest of the world. More precisely, a country’s current-account balance is exactly equal to the difference between its national saving and its investment. The future reduction in China’s saving will therefore mean a reduction in China’s current-account surplus – and thus in its ability to lend to the US and other countries. If the new emphasis on increased consumption shrank China’s saving rate by 5% of its GDP, it would still have the world’s highest saving rate. But a five-percentage-point fall would completely eliminate China’s current-account surplus. That may not happen, but it certainly could happen by the end of the five-year plan. If it does, the impact on the global capital market would be enormous. With no current-account surplus, China would no longer be a net purchaser of US government bonds and other foreign securities. Moreover, if the Chinese government and Chinese firms want to continue investing in overseas oil resources and in foreign businesses, China will have to sell dollar bonds or other sovereign debt from its portfolio. The net result would be higher interest rates on US and other bonds around the world. Read China’s Five-Year Plan and Global Interest Rates here .

In his latest column for CBS Moneywatch , Mark Thoma asks How long will it be until the Fed raises interest rates? And he shares some helpful recent analysis from Glenn Rudebusch , senior vice president and associate director of research at the Federal Reserve Bank of San Francisco . Rudebusch has a collection of graphs that hit on seemingly all of the key variables when it comes to monetary policy decisions. From the positive trends... ...to the not so positive. Rudebusch argues that the unemployment rate is key, and that the slow rate of recovery for jobs trumps overall economic recovery when it comes to any move on the target interest rates: Given the extended nature of the expected recovery to levels of unemployment and inflation consistent with the Fed's mandate for full employment and price stability, the policy rule also suggests little need to raise the funds rate target anytime soon. Of course, this projection of future policy will change as economic forecasts are revised. Such conditionality is consistent with the FOMC's forward-looking policy guidance from its January 26 meeting, that "economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period." In the simple rule, the length of the "extended period" depends on the expected paths for unemployment and core inflation. Therefore, the downward revision over the past few months to the projected path of the unemployment rate translates into a higher path for the funds rate and an earlier liftoff from a zero funds rate. However, according to the simple policy rule of thumb, the positive unemployment news since last October appears to have shortened the duration of the "extended period" of near-zero interest rates by only about three months. Substantial monetary policy accommodation appears warranted for some time. Read all of Rudebusch's analysis here .

We pointed to some economists' responses to the Fed's quantitative easing efforts earlier today. But we just read Federal Reserve Chair Ben Bernanke 's own explanation for why the Fed is taking this approach. Bernanke shared his reasoning in an op-ed for the Washington Post , and the strategy--whether you agree with it or not--comes across much more clearly than reading the FOMC's announcement. Bernanke writes: The FOMC decided this week that, with unemployment high and inflation very low, further support to the economy is needed. With short-term interest rates already about as low as they can go, the FOMC agreed to deliver that support by purchasing additional longer-term securities, as it did in 2008 and 2009. The FOMC intends to buy an additional $600 billion of longer-term Treasury securities by mid-2011 and will continue to reinvest repayments of principal on its holdings of securities, as it has been doing since August. This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion. Read What the Fed did and why: supporting the recovery and sustaining price stability here . And if you are looking for clearer language on the Fed's policy, Planet Money tried an interesting approach. They took the FOMC announcement, and have translated it into what they call "plain English." "Plain English," as it turns out, includes some sarcasm. But this might still be a helpful way to make sense of the action. For example, where the Fed release has this language: To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Planet Money staff gives you this: So to give the economy a kick in the ass—and to pump up inflation a little bit—we decided to go on a shopping spree. A bit more straightforward, no? Try it out for yourself by clicking here .